Legendary fund manager Li Lu (whom Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that ATOSS Software AG (ETR: AOF) uses debt in its business. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest analysis for ATOSS software
What is ATOSS Software’s net debt?
The image below, which you can click for more details, shows that ATOSS Software had a debt of 9.56 M â¬ at the end of June 2021, against 10.7 M â¬ over one year. However, it has 33.2 million euros of cash to compensate for this, leading to a net cash of 23.6 million euros.
How healthy is ATOSS Software’s balance sheet?
Zooming in on the latest balance sheet data, we can see that ATOSS Software had a liability of â¬ 21.1m due within 12 months and a liability of â¬ 16.2m due beyond. In return, he had â¬ 33.2 million in cash and â¬ 12.9 million in receivables due within 12 months. So he actually has 8.79 million euros Following liquid assets as total liabilities.
Considering the size of ATOSS Software, it appears that its cash flow is well balanced with its total liabilities. So the â¬ 1.53 billion company is highly unlikely to be cash-strapped, but it’s still worth keeping an eye on the balance sheet. Put simply, the fact that ATOSS Software has more cash than debt is probably a good indication that it can manage its debt safely.
And we also warmly note that ATOSS Software increased its EBIT by 18% last year, making its debt more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether ATOSS Software can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with hard cash, not with book profits. While ATOSS Software has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) this cash balance. Over the past three years ATOSS Software has generated strong free cash flow equivalent to 77% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
While it still makes sense to investigate a company’s debt, in this case ATOSS Software has $ 23.6 million in net cash and a decent balance sheet. And he impressed us with free cash flow of â¬ 19m, or 77% of his EBIT. So, is ATOSS Software’s debt a risk? It does not seem to us. On top of most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you understood this as well, you are in luck because today you can check out this interactive historical earnings per share chart from ATOSS Software for free.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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